Warehouse, E-Commerce, And International Expansion Will Support Future Success

Key Takeaways

• Expansion of warehouse locations and gas station hours aims to increase membership, store traffic, and revenue growth.
  
• E-commerce growth and international market investments could boost overall earnings and diversify sales.
  
• Rising costs from labor, tariffs, and supply chains, along with foreign exchange fluctuations, could pressure Costco's margins and market competitiveness.

Catalysts

Engages in the operation of membership warehouses in the United States, Puerto Rico, Canada, Mexico, Japan, the United Kingdom, Korea, Australia, Taiwan, China, Spain, France, Iceland, New Zealand, and Sweden.

• Costco plans to continue expanding its warehouse locations, with 28 new openings planned for fiscal year 2025. This expansion is likely to increase membership and sales volume, driving revenue growth.
  
• Costco's extension of gas station hours is designed to enhance member convenience, which could lead to higher gasoline sales and increased store traffic, positively impacting revenue.
  
• The updated employee agreement with higher wages may initially increase SG&A expenses, but Costco's focus on labor productivity and cost discipline could help maintain net margins over time.
  
• E-commerce and digital channels show significant growth, with e-commerce comp sales up 22.2% adjusted for FX, suggesting a strong potential to boost revenue and earnings from online sales.
  
• Continued investment in international markets with new warehouse openings and the introduction of Executive Memberships in additional countries could further diversify and increase international sales, enhancing overall earnings potential.

Costco Wholesale Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Costco Wholesale's revenue will grow by 7.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.9% today to 3.2% in 3 years time.
• Analysts expect earnings to reach $10.4 billion (and earnings per share of $23.52) by about September 2028, up from $7.8 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $8.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 55.6x on those 2028 earnings, up from 55.4x today. This future PE is greater than the current PE for the US Consumer Retailing industry at 21.7x.
• Analysts expect the number of shares outstanding to grow by 0.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.78%, as per the Simply Wall St company report.

Costco Wholesale Future Earnings Per Share Growth

Risks

• Foreign exchange fluctuations have negatively impacted Costco's international sales and profits, introducing uncertainty into net income and earnings.
  
• Increased labor costs due to the updated employee agreement could pressure margins, as Costco plans to improve wages significantly over the next few years.
  
• Tariff unpredictability and potential trade tensions, especially with a significant portion of sales being imports, could impact future costs and profit margins adversely.
  
• Supply chain cost increases, as Costco invests in maintaining higher inventory levels amidst global delays, could exert pressure on core operating margins.
  
• Rising competition from other retailers might impact market share and revenues, especially if they struggle to maintain price leadership amidst inflationary pressures.

Valuation

• The analysts have a consensus price target of $1072.667 for Costco Wholesale based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $1225.0, and the most bearish reporting a price target of just $620.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $329.0 billion, earnings will come to $10.4 billion, and it would be trading on a PE ratio of 55.6x, assuming you use a discount rate of 6.8%.
• Given the current share price of $979.25, the analyst price target of $1072.67 is 8.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.